The Assignment
A mid-level investing bank needed to implement a stress testing framework in accordance with guidelines issued by the central bank.
Our mandate was to develop a collaborative, auditable, repeatable, and transparent stress testing program to meet regulatory expectations, inform on the bank’s risk appetite framework, and improve strategic business decisions.
Our Solution
The solution included the following key features:
1. Stress testing
Our stress testing framework comprised of regular stress tests and scenario analysis with severe macroeconomic global downturn scenarios. We included all material risk types into our stress testing exercises which included portfolio- and country-specific stress tests.
2. ICAAP
Capital plan stress testing was performed to assess the viability of the capital plan in adverse circumstances and to demonstrate a clear link between risk appetite, business strategy, capital plan and stress testing.
3. Scenario Analysis
The stress test framework also consisted of defined macroeconomic downturn scenarios which were based on quantitative models and expert judgments, economic parameters such as foreign exchange rates, interest rates, GDP growth or unemployment rates.
4. Reverse Stress Testing
Reverse stress test were to be performed annually in order to determine the severity of scenarios that would cause the bank to become unviable.
5. Risk Reporting and Measurement
The stress testing framework supported regulatory reporting and external disclosures, as well as internal management reporting, to be presented to senior management as well as to the risk committees, who are responsible for risk and capital management.
Key Takeaways for the Client
A robust stress testing framework that integrated governance, documentation, data quality management, economic scenario development, loss modeling, forecasting, and reporting and incorporated participation of all stakeholders across business units.
The framework was integrated across asset classes and lines of business and enhanced risk management and was customized to the unique strategies and risks of the bank’s portfolio
INTERNATIONAL PARTNERS
NEW YORK & INDIA
Our work in Basel Implementation
The Assignment
The client, an investment bank was preparing itself for comprehensive compliance to Basel norms.
The gap analysis needed to comprise of a business gap analysis and a Data Gap analysis for the following:
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Standardized Approach and Internal Ratings Based Approaches
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Basic Indicator/Standardized/Advance Measurement Approach (IMA) of Operational Risk
Our mandate was to find the gaps in the bank’s risk management framework to assess compliance with Basel norms.
Our Solution
We conducted a gap analysis based on International Convergence of Capital Measurement and Capital Standards and applicable guidelines published by Saudi Arabian Monetary Agency (SAMA). On the basis of the Gap analysis, we developed an implementation road map for the bank, highlighting the tasks to be undertaken, responsibilities, efforts and cost estimates along with specific timelines for achieving Basel II compliance. We assisted the bank in setting up a dedicated Basel II Program Management division for overall program management, design and monitoring of Basel II implementation. We developed the relevant risk management policies and processes, a risk governance framework and designed credit and operational risk measurement models for the bank.
Key Takeaways for the Client
As a result of the gap analysis, the client received a gap report which detailed the tasks required for compliance with standardized approach and the internal ratings based approach. The report highlighted the gaps in the risk management process, organization, methodologies and modeling framework as well as detailed Basel II data definitions and validation, complete drill down of data mapping process from aggregate to field level, a consolidated detailed system/data gap analysis and ongoing monitoring and reporting process on gap resolutions. An implementation roadmap was provided to the client which contained a detailed description of tasks required to ensure Basel II compliance and a structured program with the required processes, procedures, communication and reporting.